1. Field of Invention
The present invention relates generally to the field of debt relief or debt resolution. This invention provides a more efficient market solution and an alternative to existing and malfunctioning debt settlement methods (both debt restructure and debt settlement—along with debt consolidation and bankruptcy—are branches of the general field of debt relief/resolution). More particularly, the present invention is a useful and novel computer network-based method of modeling a debt market, restructuring debt and debt ownership, and enabling and executing debt-purchase transactions in much less time than current debt settlement debt-negotiation practices. A system and technology infrastructure for practicing the method is disclosed.
2. Discussion of Related Art
The existing debt settlement market is in immediate need of a new method of conducting business. Analysis of the existing market reveals fraudulent, abusive, and deceptive practices that pose risks to consumers, and an absence of a market process that best achieves the interests of the creditors and/or the debtor consumers.
As consumer debt has risen to historic levels, a growing number of for-profit debt settlement companies have emerged. Debt settlement companies promise to negotiate, on the debtor's behalf, debt settlement agreements with creditors. Debt settlement companies typically represent that they will settle debt at forty to fifty cents on each dollar owed. In a typical debt settlement services contract, the debtor is required to make monthly payments into an escrow account until there are sufficient funds in escrow to permit the debt settlement service provider to negotiate a one-time settlement payment with the creditors. It may take years for sufficient funds to be accumulated. Debt settlement providers often charge a service fee up front, and almost all collect their fees from the escrow account during the first half of the contract, regardless of whether any debt settlement services have been, or will be performed. Debt settlement companies usually advise consumers to stop paying their creditors and to instead set up a special account to build savings that will be used in the future to negotiate a settlement. As the consumer deposits savings into the account, the debt settlement company withdraws money to cover its fees even though it hasn't reached a settlement with creditors. By stopping payments to creditors, the consumer ends up with a worse credit score, additional penalty fees and more interest charges, and becomes exposed to aggressive collection practices, lawsuits and bankruptcy. An additional disadvantage of current debt settlement industry practice is that, where the debt settlement company takes is fees up front or during the first half of the settlement period, the debt settlement company is not incentivized to reduce the amount of the debt, but merely to establish a payment plan. Further, once the debt settlement company takes its fees, it has little or no incentive even to negotiate any settlement.
In April 2010, the United States General Accountability Office (GAO) reported on its investigation into allegations that debt settlement companies engage in fraudulent, abusive, or deceptive practices that leave consumers in worse financial condition than they occupied before engaging the services of the debt settlement companies. The GAO concluded that “some debt settlement companies engage in fraudulent, deceptive, and abusive practices that pose a risk to consumers already in difficult financial situations.” In fact, 17 of the 18 debt settlement companies from which the GAO was able to obtain information “follow a business model that calls for advance fees and stopping payment to creditors—practices that have been identified as abusive and harmful.” Further, the GAO investigation concluded that “most of those [debt settlement companies] we contacted provided information that was deceptive, abusive, or, in some cases, fraudulent.” For example, debt settlement companies claimed success rates that the GAO “found suspiciously high—85 percent, 93 percent, even 100 percent.” In contrast, federal and state agencies report success rates in the single digits. Other GAO findings that constitute fraudulent or deceptive practice include guarantees or promises to obtain minimum reductions in debts (typically 40 to 50 cents on the dollar), false representations of membership in industry associations, indications that the programs are linked to the government or government programs. [Source: Debt Settlement—Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers; United States Government Accountability Office; Gregory D. Kutz; Apr. 23, 2010.]
The Better Business Bureau (BBB) designated debt settlement as an “inherently problematic” business. Debt settlement companies are allowed by the BBB to escape the inherently problematic designation if they are able to prove, among other criteria, that “a majority (at least 50 percent) of its clients successfully complete its program and obtain a reduction in debt that is significant and exceeds the fees charged by the company.” The two leading debt settlement industry associations, the Trade Association of Settlement Companies (TASC) and the United States Organizations for Bankruptcy Alternatives (USOBA) state that the 50 percent success rate criterion is “unrealistic.” (Source: Debt Settlement—Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers; United States Government Accountability Office; Gregory D. Kutz; Apr. 23, 2010)
The FTC reports that nearly two-thirds of consumers who enroll in debt relief services, most of which pay an advanced fee, end up dropping out of the programs within the first three years without getting the help they paid to receive. (Source: FTC Adopts New Rules to Begin Curbing Debt Settlement Industry Abuses; PR Newswire United Business Media Website; Jul. 29, 2010; retrieved Nov. 15, 2010; <http://www.prnewswire.com/news-releases/ftc-adopts-new-rules-to-begin-curbing-debt-settlement-industry-abuses-99568659.html>)
The United States Federal Trade Commission (FTC) has recognized the problems with existing debt settlement methods. The FTC has adopted a new set of regulations to begin addressing fraudulent, abusive and deceptive practices. The FTC adopted amendments to 16 CFR Part 310 Telemarketing Sales Rule (Rule), fully effective Oct. 27, 2010, which address the telemarketing of debt relief services. In that amendment, a debt settlement company is prohibited from collecting fees until it reaches a settlement on at least one of the consumer's debts that the consumer agrees to in writing, and the debtor has made at least one payment to the creditor under the settlement agreement. The Rule also requires specific pre-contract disclosures of material information about offered debt relief services, such as how long the settlement process will take to achieve results and how much it will cost, and prohibits specific misrepresentations about material aspects of debt relief services.
While the FTC Rule takes a step in the correct direction, it falls far short of resolving industry issues. The FTC Rule applies to telemarketing activities and inbound calls made to debt relief companies in response to general media advertisements. The FTC Rule provides no relief for in-person sales or Internet-only sales. Further, the FTC Rule addresses the timing of fees only; not the nature, amount or fairness of fees. More generally, the FTC Rule does little to create a market which is responsive to the broader needs of both the creditor and debtor, such as timely debt resolution transactions and credit score recovery, avoidance of collection, lawsuit and bankruptcy actions, and maximized return to the creditor. What is needed is a method and system for restructuring debt and debt ownership.